Controversial tax measure IR35 is in the firing line again after figures show it has raised far less for the government than it was supposed to.
A Freedom of Information (FoI) request made by the Professional Contractors Group (PCG) to Her Majesty’s Revenue & Customs (HMRC) has shown that IR35 has raised just £9.2m between the tax years of 2002/03 and 2007/08. This is some way short of HMRC’s estimation that it would raise £1bn over three years in tax and National Insurance Contributions (NICs).

Giles Clifton, policy adviser for the PCG, told Recruiter: “It shows up quite clearly that the thinking behind this measure was off the scale.”
Now the PCG wants political parties to sit up and take notice. It has submitted another request for the years not covered by the latest information, Clifton added. “What we are doing is finding out further information so we can reveal the entirety of the picture. Then we can say to every political party, ‘This was supposed to bring in £x but it has brought in £y’.

“This data is the kind of evidence that shows this [IR35] is fairly pointless.”

IR35 was proposed in the 1999 Budget of then Chancellor Gordon Brown to target “disguised employment” - workers who receive payments from a client via their own company. These payments are not subject to NICs as they can be treated as dividends, and workers can also save tax by splitting ownership of the company with family members in order to place income in lower tax bands.

IR35 aimed to prevent these benefits by taxing individuals working via intermediaries at a rate similar to direct employees. Under the legislation, recruitment agencies who set up or administered intermediary companies for clients could be liable for underpaid tax.

However, not everyone who works with contractors is saying that IR35 should be scrapped. Terry Hillier, managing director of RACS Group, which provides umbrella services to contractors, told Recruiter that it should remain, as a more onerous piece of legislation could be adopted in its place.

He said: “If we push too hard for the abolition of IR35, it’s going to come back harder and faster in a different guise further down the road.
“People are used to it now, or should be. A genuine contractor should be aware of the legislation.”

Hillier said he was not surprised “in the slightest” by the figures, adding: “The policing of this has been abysmal by HMRC. How much has it cost to bring these cases against people? The solicitors’ fees must be astronomical.”

HMRC said it could not reveal how much it had cost to bring the cases before the courts, as IR35 compliance is only one of a number of risks examined when employers’ records are reviewed, but it did point out one fact that the FoI request had not accounted for.

An HMRC spokesman told Recruiter: “They [the figures] do not take into account revenue from voluntary compliance where taxpayers identify that the legislation applies and pay the appropriate amount of tax and National Insurance, or the deterrent effect where those who might otherwise disguise employment income through the use of an intermediary decide not to because of the presence of this legislation.”

A leading recruitment lawyer has suggested that IR35 could affect the tax take in two ways not covered by the FoI request.

Kevin Barrow, partner at Blake Lapthorn, told Recruiter: “Because they brought IR35 in, some contractors may have switched to PAYE, which may mean the PAYE tax take rose as an indirect result of IR35.

“However, it may have driven some contractors offshore, which would lower the tax take.”